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Suppose a perfectly competitive firm has marginal revenue equal to $4 and marginal cost equal to $2. If this firm decides to increase production, what will happen to its marginal cost? What will happen to its profit? Should it increase production?

Respuesta :

Answer:

Marginal cost will increase.

Profit will increase.

Yes, the firm should increase production.

Explanation:

A perfectly competitive firm has marginal revenue equal to $4 and marginal cost equal to $2.

A firm in a perfectly competitive market is able to maximize its profit when it produces at the point where the marginal revenue earned and the marginal cost incurred are equal.  

Since the marginal revenue is higher than the marginal cost, it means the firm can increase profit by increasing production.  

When the firm will produce more its marginal cost will increase, at the point where marginal cost and marginal revenue become equal the firm will have maximum profit.

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